House of Cards (80 page)

With Cayne's blessing, Flexner broached with Schwartz the idea of a merger between Bear Stearns and Fortress. “Alan was originally not enthusiastic about it because he thought it would be too dilutive on a book value basis,” Flexner said. “But I said, ‘That's ridiculous. We can't run our business based on book value only in today's world. You've got to look at the earnings power as well, not just book, but earnings power.’” Schwartz got sufficiently comfortable with considering the combination between Fortress and Bear Stearns that he allowed due diligence to proceed into the fall.

I
N EARLY
S
EPTEMBER
, over Labor Day weekend, Cayne and Tang (and Cayne's wife, Patricia) took Cayne's private jet from Allaire Airport, just south of Cayne's home in Elberon, New Jersey, for a secret overnight flight to Beijing. “We visited a few shops in Beijing,” Tang said, before he and Cayne headed over to the St. Regis Hotel to meet the Citic executives for their quiet dinner. “We talked about a comprehensive tie-up between Citic Securities and Bear Stearns,” he said. The idea was for Citic to make an equity investment in Bear Stearns and for Bear Stearns to make an investment in Citic in the form of convertible debt. Bear would then contribute its entire Asian operations, and Citic its entire non-China international operations, into a new company to be owned jointly by each firm. The joint venture would focus on business outside of China. “Their brand power can get us a lot more mandates in terms of all the financial industry business that we were aiming to do in Asia,” Tang said. “Our technical expertise and capability both in Asia and in New York would be moved to the joint venture.” Tang said the dinner was momentous for both firms. “Forget about the money that we were exchanging,” he said. “It was really the vision and the strategic value of transforming Bear Stearns—at the time an also-ran in the business in China and in Asia—to become a significant powerhouse with Citic, the most significant player in China's investment banking world.”

After the dinner, Tang devoted nearly every waking hour to reducing the oral agreement to a legal and binding contract. Teams from Citic
came to New York and to Los Angeles, Tang's home, to negotiate the terms of the deal and to put together a memorandum of understanding. Tang also flew to Beijing every week to work toward getting the deal agreed and announced. There was some healthy skepticism in New York about the Citic deal. “We spent hundreds and hundreds of hours working on this thing,” Paul Friedman said. “We sent people there. They sent people here. I sat in meeting after meeting trying to explain to huge delegations of Citic people what we did for a living in fixed income. If you had five years, it probably was a pretty good trade. Somewhere down the road, the Chinese were going to become more and more sophisticated in financial transactions. The theory was if nothing happened other than that we get some of the deal flow from Citic, that would pay for itself. In the long run, a pretty good thing; in the short run, insanity. To me it seemed like sort of a shell game, even beyond the fact that they were going to give us a billion dollars and we were going to give it back to them. It was a really good concept: Here is the preeminent broker-dealer in China. We get a venture with them at no cost. They're going to take us, use us, and work with us. But the venture covers non-China Asia. So what's Citic's involvement in Japan? None. So what do they bring to the table there? Nothing. We now take our Japanese employees and make them part of a joint venture with the Chinese, and there's only about a thousand years of hatred there. I never got that part. Structurally it was going to be really weird. When the firm blew up, we still hadn't resolved whether it was going to be called BearCitic or CiticBear. The managerial structure was unresolved. There were going to be co-CEOs, one from Bear and one from Citic. But that we were going to bank the whole revival of Bear Stearns on this Citic trade was like, ‘What planet are we living on?' It made no sense.” But the negotiations continued anyway.

While the rumor of a tie-up with Citic had been circulating since August, Cayne hoped to keep his trip as quiet as possible and figured that by going over the Labor Day weekend, when everyone else on Wall Street was at the beach, and returning home quickly, he would be able to keep news of the trip out of the business press. He succeeded. There was not even a hint of his trip in the papers when it happened. “We flew under the radar,” Cayne said.

T
HE OTHER BIT
of information the firm wanted to keep quiet was the fact that after Cayne returned from his trip to Beijing, he almost died. At six o'clock on the morning of September 11, Patricia Cayne placed an emergency medical call to her husband's physician, Dr. Jay Meltzer, a clinical professor of medicine at Columbia University with a private practice on
Park Avenue. She told Meltzer that her husband was very weak and had no appetite. He also was having trouble drinking fluids and was experiencing dysuria, painful or slow urination. She reported that when she'd taken his temperature the night before, he had no fever. Cayne suffered from high blood pressure and Meltzer had prescribed medication for that, which he had been taking regularly. “I knew something serious had to be going wrong because this guy does not like to be sick,” Meltzer said. When Meltzer arrived at the Caynes' Park Avenue apartment at around seven from his apartment on Central Park West, he took Cayne's blood pressure. “When I got there it was 133 sitting, with a pulse of 104, but when he stood up, his blood pressure fell to 116 and the pulse went up to 112,” he said. “He was breathing very rapidly and deeply, which suggests that he's blowing off carbon dioxide, which is something you see in acidosis for kidney failure. He had no tremor, no edema. He was drowsy but he was responsive. His skin was very dry.” Meltzer suspected he might have sepsis, an often lethal infection of the urinary tract. He decided Cayne needed to be brought to the emergency room immediately for a full examination to determine what was wrong. “It's not clear,” he said, “and there's a limit to what you can do on the physical exam.” Cayne seemed calm. “If he gets nervous or scared, he doesn't show that,” Meltzer said. “He was saying, ‘I don't really need this.' Like a lot of tough guys like that, they deny that they're [as] sick as they are, and it took a lot of convincing to get him to go to the hospital.”

Meltzer decided not to call 911 or an ambulance. “He had a driver, and I thought that we could drive him to New York Hospital quite safely and get him there in time to do what we had to do,” he said. “I kept it private.” As they drove up in Cayne's dark sedan, Meltzer arranged for Dr. Mark Pecker, a nephrologist and an expert in emergency medicine, to treat Cayne. “I knew that Mark would take great care of him,” Meltzer said. They arrived at the emergency room at eight-thirty in the morning. “Fortunately, Mark was available and he came down to the ER,” he said. “We consulted together and [Cayne] was admitted to the intensive care. It turned out that he had a fever or leukocytosis, renal insufficiency, and dehydration, and he needed antibiotics and saline.” The doctors also inserted a Foley catheter “to drain his bladder and get antibiotics in to treat the prostatitis, the acute inflammation of the prostate.” According to Meltzer, Cayne “had the highest acute PSA elevation I've ever seen”—43— “and it proves that the infection was in the prostate itself.” (Cayne's PSA levels fell to 0.4 after the infection was tamed.) Meltzer said that once the doctors figured out which “bug” was causing the infection—it turned
out to be
E. coli
—and then treated it with antibiotics intravenously, “he began to turn the corner within a couple of days.”

Cayne's recollection of the experience was far more apocalyptic. He remembered coming back from China, going to sleep, and “waking up in the hospital.” He said that the doctor told his wife that his chances of making it out alive were fifty-fifty. “When I first went in,” Cayne said, “that's when my blood pressure was 75 and the doctor went like this”— he pointed his thumbs down—“to Patricia. She said, ‘He's going to be okay, right?' And he went like this”—thumbs down again—“and first of all, that's sort of dumb. Why a doctor would say that, why the doctor wouldn't say, ‘Maybe, Good Lord willing everything will be fine,' I don't know…. For the next seven days she's like in a state of shock.”

He started to recover after three days in the ICU and then was given his own private room. He was able to watch television, and he turned on CNBC and found that Charlie Gasparino was reporting inaccurately that Cayne was on his way to China, “hat in hand.” Cayne was also not happy that Gasparino had reported on July 13 that Cayne was being investigated for allegedly cheating to win a July 4 golf tournament at Hollywood Golf Club. For his part, Gasparino, whom Cayne had given the nickname “Looney Tunes,” was by this time angry at Cayne for giving an interview to Landon Thomas Jr. at the
New York Times
. Cayne, meanwhile, was thinking he was lucky to be alive. “I've already gone to China. I got the order and I feel good about that. But now I wonder, ‘How in the world did this happen to me?’” Cayne stayed at the hospital another week or so and was out of the office for ten days total—a fact that was kept very quiet. “That came at a really bad time,” Cayne said. “It came at a time where I had to hide the fact that I was in the hospital.” He even returned to the office before he had fully recovered because he feared that Gasparino was on the verge of reporting that he had been out of the office for a long spell. He took Gasparino's call at his office at 383 Madison rather than have him think he was out.

After Cayne was out of the ICU, Donald Tang recalled, “I was there at the hospital for a very substantial amount of time. For hours and hours, throughout the day and night. Every time that he woke up, he asked about the Citic transaction, he asked about the stock price, he asks about the morale at the office. He had nothing else on his mind other than Bear Stearns. I don't want to get into details about how sick he was. He was totally beside himself. He was under
excruciating
pain. But the only thing he could think about is how he could do something about it. He wasn't thinking about [that] he's dying; rather, he was totally focused on the company.”

W
HILE
C
AYNE WAS
fighting for his life, the self-made British billionaire recluse Joe Lewis, aka “the Boxer,” started amassing a large equity stake in Bear Stearns. On September 10, the day before Cayne went into the hospital, Lewis filed a report with the SEC stating that he owned close to 8.1 million shares, or nearly 7 percent, of the company's stock, making him the largest single shareholder. Lewis started his buying spree on July 20, paying around $145 per share, and then accelerated his buying in August and September as the price of the stock fell. He purchased 1.2 million shares on September 7 for $104.93. Lewis had been a longtime client of Bear broker Kurt Butenhoff, a close confidant of Cayne's. Many in the press speculated that Cayne had encouraged Lewis to buy the Bear Stearns stock because of their connection through bridge.

Although Cayne acknowledged spending time with Lewis at his massive spread in Orlando, Florida, he denied being the person who'd convinced Lewis to invest in Bear Stearns. That responsibility seemed to belong to Butenhoff, according to CNBC. Others are not sure that Cayne was not more directly involved in helping to convince Lewis that the Bear stock had fallen sufficiently far to be worth a serious look. “I do know that Jimmy Cayne has always been willing to talk confidentially to large shareholders before earnings announcements, and I have talked to Jimmy about the law in this area,” one Bear executive said. “Joe Lewis was probably one that Jimmy talked to before he invested. Kurt Butenhoff was a broker and Joe Lewis was his client. Jimmy liked Kurt a lot. Kurt got Joe in front of Jimmy. They played golf together and smoked cigars.”